Pension relief with two jobs: HMRC answer right?

claiming extra pension relief when second job makes for a higher rate payer but first does not?

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Hello,

I asked HMRC for advice regarding pension relief when having two jobs. 

First job, lecturer at University, pays basic rate tax and pays into pension under net pay arrangement (pays pension before tax is calculated, hence got 20% relief in the payslip already).

Second job: working for the EU for just one week, nothing deducted (no tax, no pension). This income brings him into the higher rate band (and this income is included by him in self assessment  - on arising basis - so he pays full tax on this).

The question I put to HMRC is that he now is a 40% tax payer due to the EU income, but the employer did not know this extra income was going to incur, so in his only PAYE payslips, only 20% relief has been given. So asked if he can put anything in the pension relief box (box 1).

They gave a blanket no. If his employer applied net pay, tough luck, that amount was then correct. No matter what happens with a foreign second job putting him just over the basic rate limit.

Does anyone know if this is correct? And if not, can he put anything in box one, and grossed up or not?

Many thanks, Bridget

 

 

Replies (12)

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JCACE
By jcace
16th Jan 2019 13:59

His pay has already been reduced by the amount of the gross pension contribution in order to arrive at taxable pay. It is this reduced level of pay (i.e. his taxable pay, rather than his gross pay) that will be included in his tax return. No further entry of pension contributions should be included in the tax return. As income has been reduced, relief will be obtained at his highest rate.

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By muze7
16th Jan 2019 14:11

Hi Jcace, many thanks. Yes, I understand, but the relief applied was actually 20%.

Because the second job is not PAYE listed, and because the extra income brings him into 40% territory,
I was hoping he can claim an extra 20% relief, which is what many higher rate tax payers need to do if they don't have a net pay arrangement, correct? So while I understand the net pay arrangement works for most people, his situation is a bit unusual and that is why I thought I should check if he is eligible for the extra 20% relief higher rate taxpayers get....?

(And if so, how to go about it, if there is a box I could use plus some input in the additonal information box...)

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Replying to muze7:
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By David Heaton
16th Jan 2019 14:27

He gets his relief automatically through SA.

His total taxable income is reduced by the pension contributions, where he appears to have received only 20% relief. In a classic calculation, you extend the basic rate band by the pension contributions. However, what happens is that the taxable total is 80% of lecturing pay added to untaxed EU income. This means that the top end of his income has already been reduced in the 40% band. When he does his SA calculation, he gets the extra 20% relief automatically, because an amount of his EU income equal to his lecturer contributions moves from the higher rate to the basic rate band. His employer gave him 20% relief, and the SA calculation gives him the balance.

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Replying to David Heaton:
paddle steamer
By DJKL
16th Jan 2019 14:34

I concur.

If in doubt enter his gross pre pension salary into a tax calc, enter second income in same then input pension paid (net not gross of sum paid via payroll) into the comp and compare the result with your current calculation re tax liability, it ought to be the same as you currently have.

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Replying to DJKL:
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By muze7
31st Jan 2019 13:44

Ok, I did this. The results are very different.

When I put in gross income of uni and EU, and put the net pension contributions in box one of the pension relief page (payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider called Relief at source), the result is a great increase in tax vs originally.

However, if I put the net pension into box two (Payments to a retirement annuity contract or RAR where basic rate tax relief will not be claimed by your provider ), then the result is the same .

Is this what you would expect in your view of the calculations? (I am now very confused by the actual rate used in box 1 and box 2!).

Edit: For anyone who want to check this for themselves, like he said, add your pension to your basic pay but don't gross anything about the pension up (use just the amount listed on your payslip under yearly pension, you can find this as pension year to date on the last payslip of the tax year, so March). Then add the same pension in box three of the pension relief box in HMRC self assessment. The results should be the same....

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Replying to muze7:
JCACE
By jcace
16th Jan 2019 14:41

If he earns (say) £20K in job 1, but pays contributions of (say) £4K, he will only have £16K of taxable income, on which he will have paid some tax via PAYE at 20%.
If he has other untaxed income of (say) £33K, his total taxable income will be £49K, so some will be taxed at 20% and some at 40%. But he's gained the maximum tax relief on his pension contributions because his total income has been reduced by his £4K of contributions.

The extra 20% relief given where someone doesn't have a net pay arrangement is because their income is not reduced by their pension contribution. Instead, the pension contribution is reduced by only 20%.

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Replying to muze7:
By Duggimon
16th Jan 2019 14:47

The relief applied was 40%, it only looks like 20% on the payslips because he wasn't taxed at 40% on the payslips.

Reducing the gross salary for any part of his income reduces how much of it is taxed at the highest rate, therefore relief is always at the highest rate.

Don't look on it as getting 20%/40% of the pension payments as relief, look on it as moving the bands, which is what pension payments do. The first job achieves it by reducing the gross income, the other method to which you refer does it by leaving the income the same but moving the threshold. They both move by the same amount (the gross contributions) so the effect is the same.

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By Accountant A
16th Jan 2019 14:11

muze7 wrote:

I asked HMRC for advice regarding pension relief when having two jobs. 

HMRC do not exist to give tax advice to taxpayers and they certainly (as far as "contact centres" are concerned) don't have the technical knowledge to do so.

If you need tax advice, you really need to consult a competent accountant.

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By Matrix
16th Jan 2019 20:11

I think you are confusing the easily confused terms. In a net pay arrangement, pension payments are made gross so before tax so there is no tax to reclaim. If this is what happened then nothing goes on the tax return since no tax was paid.

If, however, pension contributions were made net as you suggest then the pension provider reclaims 20%. They would never reclaim 40% even if you were a higher rate taxpayer in that job.

So you would then reclaim the extra 20% on your tax return, regardless of whether this job or another job puts you in the higher rate band.

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By PBH64
17th Jan 2019 12:10

If it's under net paid it's been paid gross (I know but that's what they called it in the 1940's). It's not been relieved; it's not been taxed at all. After the SA and the addition of the EU income the pension contribution has still not been taxed and therefore if it were to be taxed it would be taxed at 40% and ergo it has received full relief by dint of being paid gross.

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By Paul Hawes
17th Jan 2019 13:21

So you can see an example of how this works Muze:
Net pay arrangement
Gross income of £35,000
Pension contribution of £1,000
Taxable income = £34,000
Second employment taxable income = £16,000
Tax @ 20% = £6,700
Tax @ 40% = £2,000
Pension cost = £1,000
Total cost = £9,700

Relief at source
Gross income £35,000
Pension contribution £800 topped up £200 by HMRC
Taxable income £35,000
Second income £16,000
Total taxable income = £51,000
Tax @ 20% = £6,900
Tax @ 40% = £2,000
Pension cost = £800
Total cost = £9,700

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By muze7
17th Jan 2019 13:53

Many thanks to everyone for their contributions! I get it now. I am also very relieved that everyone concurs.
Before posting I scoured the internet on UK rules for pension reliefs with two jobs, and I found some great in depth articles about pension relief in general. However, many expert in the comments disagreed with how other experts calculated reliefs, and this worried me greatly.
(Goes to show it is not always an easy topic).

In response to Accountant A:
"....If you need tax advice, you really need to consult a competent accountant...."

I would agree with you, but we have asked advice from a well known accountant firm before. It was not only very expensive but we received what turned out later to be the wrong advice (about when exactly you should pay tax on interest on special bonds that accrue interest each year but are inaccessible until maturation), and this made amendments necessary...

So I am hesitant to go forth on one opinion only!

In summary of all of this, it has been reinforced for me that for anyone who is just over the basic rate of tax, it might be worth paying a lump sum into your pension! It would save a lot of tax, and also, if you bring your income down this way, you might still qualify for marriage allowance!

Again, thanks to everyone who has contributed.

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